https://www.misoenergy.org/about/
One of the “control centers” at MISO Energy in Hamilton County.
Hamilton County’s unemployment rate has averaged 3.1% since 1990, a little more than one-half of the nation’s 5.8% average. The Indy metro area has averaged 4.6%. In the last decade, Hamilton County has still averaged 2.0% lower than the national average of 5.3%.
https://fred.stlouisfed.org/series/UNRATE#0
The stock market overreacted today. Job openings increased by 700,000 between July and August. Oh no! The labor market is too strong! Wages will increase! Cost-push inflation will build. The Fed will increase interest rates. We’ll be in recession soon! Boo!
Job openings are clearly falling. From an all-time high of 11.5 million to about 9.5 million in 18 months. With another 18 months of a “cooling” labor market, there will still be an historically high 8 million open positions in February, 2025. The labor market is slowly returning to “normal” after the Pandemic disruption.
This is a solid labor market, not an overheated labor market. Real wages finally grew during 2016-2020, by 7%. They spiked during the pandemic but have been flat for the last 18 months.
The number of unemployed people remains at 6 million, low by history, but not declining to unsustainable levels. 6 million is better than 8 or 15 or 23 million.
It’s a great time to be a job seeker, 3 jobs for every 2 job seekers. This is an historically positive ratio. It has been maintained for 2 years.
The unemployment rate remains at an historical low of 3.5% but is not falling.
Low unemployment is a widespread phenomenon. 22 states are below 3%. Only California, Nevada and DC are above 4.1%.
The labor force participation rate is at a 15 year high, with positive hiring and wage conditions attracting greater participation.
The quit rate remains above the pre-pandemic high, indicating that employees still see a positive labor market, but not an exploding market.
Total employment was flat for the first 11 years of the new millennium, parked at 132 million. Job growth accelerated for the next 8- and one-half years, adding a very solid 20 million new jobs. Post-pandemic, the economy has added another 4 million jobs.
This remains a Goldilocks labor market, neither too weak nor too strong. The Millennium pause, Great Recession and Pandemic have made us gun-shy. We don’t want to claim victory for fear of disturbing the labor market gods. But we are enjoying victory. 156 million employed versus 132 million employed a dozen years ago. An 18% increase.
Real mortage interest rates can be calculated as the difference between nominal mortage interest rates and the 10-year Treasury Bond interest rate. Although nominal interest rates have ranged from 3% to 16%, the real, after expected inflation, interest rates are remarkably consistent, averaging just 1.7% and ranging between 1.3% and 2.1% in 70% of the last 52 years. The peak real rate was 3.0% in 1982 following the unexpectedly high and remaining high nominal rates of the prior 4 years.
Banks, mortgage-backed securities investors and mortgage borrowers all take risks when they complete mortgage transactions. Lenders are betting that their present and future borrowing interest rates are and will be low enough to fund their mortgages at a profit. Each lender locks in funding commitments for a reasonable share of the loan life and counts on the consistency of interest rates over the business cycle to fund the remaining portion. Lenders that experience a mismatch put their stockholders’ equity at risk and face bankruptcy. Investors in mortgage-backed securities are subject to valuation change risks throughout the period in which they are invested. Most such investors hold diversified portfolios of mortgages (region, amount, riskiness, urban vs suburban vs rural) and non-mortgage assets to ensure that any investment decision will not be too damaging.
Fixed-rate mortgage borrowers are betting that inflation will not fall too much lower than the expected inflation rates when they borrowed. If so, they will be paying back the mortgage in higher real value dollars than expected. If inflation and mortgage rates drop by more than 2%, most borrowers will seek to refinance their mortgages at the new, lower market rates, paying another round of closing costs for this privilege. Fixed rate borrowers are also hoping that inflation will be higher than the expected inflation rates at the time they borrowed, allowing them to pay back their debt with cheaper real dollars. Mortgage originators do not generally have the legal right to “call” the debt and require a change in the rates and terms as many commercial lenders and bond issuers do.
The “good news” is that the US mortgage market is very efficient and the real interest rate premium for borrowing to own a home is just 2% more than what the US government pays for borrowing. Borrowers face interest rate change risks, especially being caught with a high interest rate mortgage when inflation rates fall if they are unable to refinance.
The market has been tested through 7 business cycles and held up very well. The “Great Recession” exposed excessive risk taking by mortgage originators and funders. They lost money and many went out of business. Riskier mortgages are rarely issued today, and government regulations provide some added protection against any future overreach.
For higher income households that itemize deduction on their federal tax returns, the nominal interest rate paid is a tax-deductible offset to earned income. These individuals typically pay 22%, 24% or 34% marginal tax rates. A 5% nominal tax rate can provide a 1%, 1.25% or 1.65% reduction in the effective interest rate, thereby making the 2% real mortgage rate less than 1%. Higher income households can benefit greatly from this tax benefit.
https://content.time.com/time/specials/2007/article/0,28804,1733748_1733756_1735278,00.html
Real, after inflation, Gross Domestic Product is up by one-third, despite the pandemic. That’s 2% annually, despite the Great Recession and the pandemic. The US economy is very solid.
A 21% increase in per capita income during this time. Quite solid and constant growth.
Inflation averaged a bit less than 2% before the pandemic, spiked to 8%, and has since declined to 4%. Experts disagree on whether it will return to 2% soon.
Gas prices are the most obvious component of inflation. They are largely driven by global supply and demand. Prices today are the same as in 2011-14, despite the general inflation increase of more than 20% since then.
Despite the pandemic, US unemployment is at a 50 year low!
Job seekers today encounter 3 times as many job openings.
Core age labor force participation has snapped back after the pandemic.
Investment values have doubled.
The number of millionaires and billionaires in the US has continued to increase.
Personal savings rates rose from 6% to 9% before the pandemic, shot up and fell back down to just 4% recently.
Housing values have doubled since the Great Recession.
Mortgage rates averaged 4% after the Great Recession, dropped to 3% and then increased to 6%+ as the Federal Reserve raised interest rates.
US exports have nearly doubled in 14 years.
Despite the Trump tariffs, which Biden has maintained, imports have also nearly doubled.
Despite historically slower growth rates, higher budget deficits and looser monetary policies, the US dollar is more highly valued today than in 2008.
Foreign countries still see the US as a positive ally, despite their concerns during the Trump era.
Obama returned the budget deficit to a “reasonable” 3% by 2016. Trump expanded it to 5% and then 15% as the pandemic struck. Biden drove some recovery to 5% by 2022, but has not driven further reductions.
US coal production is in a long-term decline.
Natural gas production has nearly doubled in 14 years.
Net farm income has been significantly above the base for 6 of the last 14 years, despite lavish Trump farm subsidies.
Manufacturing employment has continued to rise slowly in the last 14 years against the headwinds of international competition.
It’s difficult to put the pandemic in perspective, but here we see a 2-year reduction in expected lifespans. Opioid deaths and so-called “deaths of despair”, alcohol, drugs, suicide, also play a role.
Birth rates continue to drift lower as seen in all regions of the world.
The number of retirees has increased by more than 50%.
Retiree incomes are up by one-third, matching inflation.
Prospective retirees have doubled their cumulative savings.
The abortion rate has continued to fall in the last 30 years.
Church attendance has dropped from 40% to 30%.
The US economy recovered slowly after the Great Recession and then very quickly after the pandemic. Real, after inflation, output and per capita output increased. The labor market became very tight. Asset prices (investments and housing) rose for intrinsic and monetary reasons. The US remained a competitive international producer. The federal budget deficit was better at the end of the Obama period but worse for Trump and Biden. The pandemic reduced life expectancy and households had fewer children. Successful retirements grew and will grow. Social trends continue, uninterrupted by political positioning and policies.
Perceptions of the country and the economy are increasingly shaped by partisan political party views. Nonetheless, the US economy continues to grow and thrive.
https://chicago.suntimes.com/2022/6/10/23162642/best-photos-of-the-week-chicago
Overall labor force participation rate dropped by 1.5% in the pandemic and has recovered by 1%, still 0.5% below the recent history. However, the prime age category and several market segments no meet or exceed their pre-pandemic levels. Many details to consider.
Hispanic participation is now 1% higher than the 2018-19 average before the pandemic.
The Asian participation rate is up 1%.
The Black participation rate is up 0.5%.
The White participation rate dropped by 1.5% and has recovered by half: 0.75% better but 0.75% below history.
The Women’s participation rate has essentially recovered to the 2018-19 average but is a half point lower than the peak levels seen just before the pandemic.
The male participation rate dropped by 1.5% but has only recovered by 0.5%, a major 1% below pre-pandemic times. Part of this is due to the long-term downward trend. Part of this is a “mix variance” driven by the very high number of “baby boomers” moving into normal retirement age or retiring early.
https://www.richmondfed.org/publications/research/econ_focus/2021/q1/district_digest
Black men are back to their pre-pandemic participation rate.
Black women are more active labor force participants.
Hispanic men remain 1% below their pre-pandemic labor force participation rate.
Latino women have recovered to their historically high 61% participation ratio.
The White male participation rate dropped by 2% and has not recovered. Again, part is due to the long-run downward trend. Part is the aging of baby boomers into retirement. The remainder appears to be a response to the pandemic experience. “I’m not working unless you make it worth my while.”
White women remain a little below their 2018-19 average and three-quarters of a point behind their pre-pandemic peak level.
Teenage work participation has increased by 1.5% as entry level wages have risen.
College grad age participation rate has mostly recovered but remains 1% below the pre-pandemic high.
The retirement age workforce reduced its participation rate by 1.5% and has stayed there after a brief pseudo-recovery.
The prime age work force is now above even the elevated pre-pandemic level and a full one percent above the 2018-19 average. This is very good news, reflecting a strong economy an labor market.
Prime aged men have returned to the workforce.
Prime aged women are the “rock stars”, increasing their participation by 2% from 2019.
Non- high school graduates have added 1% to their labor force participation as real wages have increased.
High school graduate participation dropped by three points before recovering by two points.
Individuals with some post-high school education, but not a bachelor’s degree, are in the middle range of US educational attainment. Their labor force participation rate had declined by almost 3 points in the 6 years before the pandemic, dropped by another 2 points during the pandemic and has not “recovered”.
Labor force participation by bachelor’s degree holders was stable before the pandemic, then dropped by 2 points and has since recovered by a little more than 1 point, remaining about one-half point below the prior average.
Individuals with a high school degree or higher have displayed drops of 10 points in labor force participation across the last 30 years. Most of this change is due to the “mix variance” of lower participation by an increasingly older and retired population, but some reflects other causes.
Foreign born members of the US labor force have fully “returned to work” after the pandemic.
This participation growth improvement has taken place as the foreign-born population has increased to its trend growth rate.
https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=103862
In general, rural labor markets have grown more slowly in the last 15 years and shown greater reductions in labor force participation. Some of the increased labor force participation in the last 2 years may reflect a recovery from these declines.
https://www.bostonfed.org/publications/new-england-economic-conditions/2023/april.aspx
Most states show a similar pattern of labor force participation in the years before the pandemic, declining by 2-4% and afterwards recovering to their pre-pandemic level. California’s recovery has been slower. The New England states had an unusual increase in labor force participation before the pandemic and have not seen a major recovery after the pandemic.
Several sources decry the decline in the number of workers and the labor force participation rate, noting that it holds back the economic recovery and taints the 3.5% unemployment rate.
https://www.uschamber.com/workforce/understanding-americas-labor-shortage
Other sources point to the long-term downward trends in participation as the biggest factor, mostly driven by an aging workforce and recent higher than normal retirement rates. Pre-pandemic forecasts showed a one-half point decline in participation, matching the actual 2023 data. Detailed analysis shows that the age adjusted participation rate is a little higher. The core group, aged 25-54 population, also shows labor force participation recovery to relatively high pre-pandemic levels. So … there are demographic, racial, education, birth country, rural/urban, location and state differences in participation. There are opportunities for higher participation in a strong economy and labor market. However, the recovery from the pandemic is complete, reflecting this strong economy and labor market.
https://www.axios.com/2023/06/02/jobs-report-workers-prime-age-labor-force-participation
https://www.atlantafed.org/chcs/labor-force-participation-dynamics
The overall CPI index increased smoothly during the last 30 years until the pandemic. The Great Recession created a small blip up and down. Prices have recently increased by a very large 15% in less than 3 years versus the usual 5% in that time.
From June, 2020 through September, 2021 annual inflation jumped up to 5%. In the 9 months from October, 2021 through June, 2022, annual inflation spiked up to 10%.! This was mainly driven by durable goods prices as the unexpected rapid recovery from the pandemic encouraged consumers to buy “stuff” since they could not buy services. Since July, 2022 annual inflation is CLEARLY much lower, just 3% to 4% depending on the exact months chosen. Inflation appears to be decelerating as the May, November and May indices are 291, 299 and 303. The last 6 months’ inflation is just two-thirds of the prior 6 months.
Unfortunately, the core inflation measure, excluding food and energy, remains near 5%.
Energy prices have fallen quickly from their peak in June, 2022.
Auto gas prices are volatile, determined by the global oil market. The spike from $2/gallon to $4.50/gallon impacted American consumers. The return to $3.50/gallon is welcome, but prices are still 50% higher than the 2015-20 period.
In 25 years, durable goods prices had dropped by 25% due to globalization. In 2 years, they spiked up by 25% as global manufacturers were unprepared for the rapid recovery in demand. Manufacturers, wholesalers and retailers have NOT given back any of that 25% increase in prices, but durable goods inflation has returned to zero.
Nondurable goods followed a similar pattern with a 19% increase followed by flat prices.
The services sector experienced mild inflation during the first 18 months of the pandemic, but has increased to a 6% annual rate as businesses re-established their business models and labor supplies. This sector has slowed to 5%, but remains the greatest concern for reducing the overall inflation rate.
Medical care inflation remains at its 20-year level of 10% or more per year. As medical care has grown significantly as a share of the economy, it’s inflationary disease further infects the economy. Labor shortages play a minor role in this industry. The lack of competition or other incentives for real productivity improvements (Baumol’s disease) drive massive inflation even as US health results such as lifespans decline.
Transportation includes both durable goods and energy prices. A 25% price increase before it flattened off.
The used car and truck market experienced 50% price increases when the new car and truck pipeline was disrupted. Once again, prices have flattened, but not declined significantly to return to the pre-pandemic level.
Housing inflation jumped up from 2% to 7% as the pandemic and subsequent Federal Reserve Bank mortgage interest rate increase disrupted the housing construction market. While housing inflation has declined from its peak, the long-term imbalance between supply and demand predicts some future inflation.
The 40% spike in home values was even higher than that shown for durable and nondurable goods. Flat prices make sense for the next year or two.
The jump in imports was driven by the increased demand for durable goods.
Producer prices were flat for 10 years, then up by 30%. No inflation remains, but some deflation is possible.
From 2015-20 historically high demand for labor drove a 7% increase in real wages as unemployment reached a 30 year low of 3.5%. For the last 3 years wages have trailed inflation. No wage-price spiral.
https://bipartisanpolicy.org/report/deficit-tracker/
Until February, the federal government budget deficit had returned to the pre-pandemic 2019 pattern. In the last 3 months spending has accelerated, adding to aggregate demand and causing the economy to expand faster, perhaps beyond its limits, supporting greater price inflation.
The government response to the pandemic threat generated much greater savings and subsequent spending/aggregate demand than any recent recession situation. The benefits have now mostly run out. Consumer demand has remained high but will likely decline.
The unprecedented expansion of the money supply by the Federal Reserve Bank in 2020 is difficult to explain or analyze. The Fed responded to the clear risk of a banking system collapse by providing “loose money” access to all entities. This monetary expansion did not result in immediate consumer inflation, but it did help to inflate asset prices: investments and housing. The Fed has begun to reduce its holdings of assets as it tries to increase interest rates.
The Fed has more than doubled interest rates. This has slowed down the housing, stock and acquisition markets.
Corporate profits tripled from $500 billion in 2000 to $1.5 trillion in 2007. Profits slowly grew up to $2.0 trillion by 2019. Profits spiked by another 40% in response to the pandemic opportunities.
The drivers and components of inflation mostly point towards lower inflation in 2023 and 2024. The Fed is going to increase interest rates again this year which will reduce housing starts and corporate capital and inventory investments. The economy has so far resisted the higher interest rates, but the cumulative impact of tighter credit and lower savings will eventually offset the optimism of a historically positive labor market.
The pandemic caused producers to initially reduce their productive capacities. The unexpected rapid recovery of demand prompted by loose monetary and fiscal policies caused demand to greatly exceed supply. Inflation peaked at 7% and then began to drift back down. Corporations took advantage of the disruption to sharply increase prices, which have now flattened but not declined. Excessive fiscal policy (budget deficits) and high consumer spending driven by extremely tight labor markets driven by historically high corporate profits have maintained aggregate demand and prices.
There is a “tipping point” situation in this economy. The Fed is increasing interest rates. This is slowing consumer borrowing and housing demand in the face of demographic factors that normally promote new household formation and the economic benefits that typically accompany this investment. Consumers are using their pandemic driven savings to consume but are now running out of savings. The stock market very quickly recovered from the pandemic, but then declined and has since partially recovered based on a narrow set of AI based tech companies. The banking and credit sector is at risk, with several high-profile bankruptcies, but no clear evidence of a panic. Corporations are earning record profits, benefitting from prior low-cost debt, but struggling to hire employees. Overall, I think that prices will fall back to the 2% level by the middle of 2024.
https://fred.stlouisfed.org/series/UNRATE
In my adult lifetime, the minimum possible sustainable unemployment rate was said to be 5%. It could be a little bit lower without driving inflation much higher, but not much lower. Well … in 2018-2019-2020 we reached a solid sub-4% rate and stayed there, without triggering accelerating inflation. In a short 2 years after the pandemic shock, we returned to sub-4% unemployment.
At the state level, we have 19 states with less than 3% unemployment, a previously unimaginably low level. We have 40/50 states below 4%.
https://www.bls.gov/web/laus/laumstrk.htm
At the metro area level, the results are even more amazing. A majority of the 389 areas have unemployment rates of 2.9% or lower. 3 New Hampshire areas have unemployment rates of 1.1%. Seven Alabama metro areas show 1.6% unemployment!
https://www.bls.gov/web/metro/laummtrk.htm
Yes, we also saw good news 12 months ago.
The relationships between firm size, age, growth, survival, death, locations and job creation and retention are many, complex and politicized. However, the core relationships expressed in my 2 recent posts are well supported by data and theory. I’d like to share more background information.
The 10-year job survival rate for startups is roughly 80% and has improved in the last 10 years. However, the FIRM survival rate is much lower. The surviving firms, through economic natural selection, grow rapidly from a low (4 average employees) initial base.
This study of 2011-14 highlights the initial start-up job surge, followed by 10 years of net job attrition and then modest net job growth by mature firms when low firm death rates (5%) are exceeded by decent levels of net jobs added.
The Small Business Administration (SBA) reports the average firm survival rates for 1994-2019 as roughly two-thirds for 2 years, one-half for 5 years, one-third for 10 years and one-fourth for 15 years.
My review of the 10-year data confirmed the 33% rate for most of the period, with an increase to 36% for firms that began after the Great Recession in 2010-12.
https://www.chicagobooth.edu/review/surprising-numbers-behind-start-survival-rates
This post-recession improvement was widespread, across most industries.
In 2010, Kauffman Foundation researchers summarized the detailed Business Dynamics Statistics (BDS) data, showing the relatively slow decline in net added employment from 100% initially to 80% at 5 years to 70% at 15 years and the rapid decline in the surviving firms rate to one-half at 5 years, 40% at 10 years and just 20% at 25 years.
Another Kauffman report from 2010 shared similar results. The universe of firms is dominated by young firms because the cumulative attrition makes “mature” firms quite rare.
Another Kauffman report in 2009 summarizes this competition between dying firms killing jobs and surviving firms adding jobs. In the first 5 years, the firm failure rate is so high that it overwhelms the high job growth rate of those successful startups. In years 6-10, the death rate is still winning, but the total net job destruction is much smaller. For this 18-year data set, firm deaths exceed added jobs at every age, although 29+ year-old firms basically break-even. This is a critical insight when thinking about the claim that all or nearly jobs are added by startups. It is “true” due to the firm survival and jobs added rates at different ages. It is possible to have quite different results, with existing firms accounting for relatively more jobs, but that would require either the firm/establishment death rates to fall or the job creation rates of surviving firms to increase significantly. It looks like there has been some of that change after the Great Recession. This chart also helps to show that the “net, net” addition of jobs from start-ups, when considered as the sum of their first 5 years is in the 75-80% range, because the net jobs lost in those early years is only 5% per year, despite the more rapid loss of firms.
My summary of the last 30 years of data shows that startup firms do account for “all” new job growth. As others note, in a way this is almost “by definition”, because this is the only age group that only has “adds”, but no “losses”. It always must be positive. As we’ve seen in the details on job departures/hires, jobs created/lost, firms created/lost and establishments created/lost the positive and negative flows tend to be “roughly equal”. Hence, even a single year which is not burdened with an offset will stand out as the “big winner”. So, on the one hand we can discount the critical, essential, vital role of startup job creation, but we can’t ignore it. It is a necessary part of the life cycle of firms that delivers a growing economy.
The 2010 Kauffman study combined the initial jobs created with the jobs lost in the next years to emphasize the vital role of startups, using 2007 data. Mature firms also made a small contribution to jobs added.
Click to access size_age_paper_R&R_Aug_16_2011.pdf
A follow-up report in 2011 by Dr. Haltiwanger summarized the data slightly differently but tells the same story. New firms, nearly all “small”, account for almost all job growth. Other small firms destroy jobs in their first 10 years at a high rate and as mature firms at a modestly high rate. Middle-aged firms lose jobs while successful firms grow to more than 500 employees and become large firms! Young large firms add a few net jobs. Old large firms lose a small percentage of jobs for this time period (1992-2005).
The same author updated the calculation with more recent data and found the same basic results.
The central takeaway remains valid with more recent data across industries. The initial growth of jobs is not offset by the net losses in the next 5 years. Firms more than 6 years old do not add jobs overall.
A different set of data indicates that about one-half of net jobs added come from firms with 250 or more employees.
Another analysis indicated that nearly all added jobs were at “middle market” firms rather than startups.
I don’t know how to reconcile these competing claims but expect that the time periods chosen, and firm sizes chosen, are keys to understanding the significantly different claims.
https://www.bls.gov/spotlight/2022/business-employment-dynamics-by-age-and-size/home.htm
The most recent BLS report shows that startups and large mature firms add jobs.
Click to access size_age_paper_R&R_Aug_16_2011.pdf
Kauffman also created a complete theoretical model of job changes through time based on the key parameters and demonstrated that the model was a good match with the observed relative consistency of the parameters and the net output of jobs created. In a prior life, we called this the “layer cake” graph, using it to explain the composition of revenues or profits in a business based upon the year of customer contracts signed or new products introduced. At any point in time, there is a history of additions of various ages. Employment tends to decline over time based upon the combination of firm deaths, establishment gains/losses and internal job growth. Each year a new group of firms is added, all with job gains in the first year. This group too follows the pattern of job erosion in the first 5 years, smaller erosion in the next 5 years, close to break-even by age 20 and small net job creation for the mature surviving firms. Again, the parameters could be different, and the results would be different. But this framework provides economists and statisticians with the tools to analyze the components.
Another author created a dynamic model which illustrates how this process works through time.
https://www.cbpp.org/blog/startups-fuel-job-growth-animated
The Small Business Administration promotes the view that small businesses (less than 500 employees) are essential to the US economy and create a majority of all jobs. As noted above, startups are the key. Size is a byproduct.
https://bipartisanpolicy.org/blog/trends-in-new-business-creation/
In my earlier post I discounted the importance of the decline in the share of new to total firmsbecause the corresponding decline in failure rates and improved job creation by mature firms was still delivering solid annual job creation. However, this warning signal is worth monitoring together with the other measures. The Brookings Institution provides some other “warning signals” about the health of the new firm/job creating capacity of the economy in light of reduced measurable competition in many industries (a topic for another day).
Startup rates are down in most industries.
New firms account for a smaller share of total employment.
Business formation takes longer. Recent Kauffman reports shows that this trend has continued.
The entrepreneurship rate of college educated Americans has fallen most significantly.
One professor analyzed this and concluded that it was the result of American firms taking advantage of the low cost of capital and paying the higher salaries and incentives needed to attract and retain high potential employees. He says that job creation is happening more in existing firms and less in startups with no negative overall effect. He says that “marginal” (low return) entrepreneurs have been removed with little negative impact on the economy as a whole.
The slowdown in the new firm/job creation rate after the Great Recession attracted much attention from the media and politicians. Two representative articles are listed below, mostly bemoaning the decline of startups/small firms and the relative growth of large firms.
With the renewed emphasis on small firms and public policy to support them, others have responded by emphasizing the benefits of large firm growth and questioning the need to support/subsidize small firm growth.
https://thereader.mitpress.mit.edu/small-business-job-creation-myth/
https://hbr.org/2016/06/do-startups-really-create-lots-of-good-jobs
Using less than 250 employees to define “small business”, this article shows a 4% decline in small business share and 4% increase in large business share.
https://www.wsj.com/graphics/big-companies-get-bigger/
The Wall Street Journal reports that there are now more employees at very large (2,500+) versus small (<100) firms.
Professor Haltiwanger reports that large, mature firms have increased their share of total employees from 50% to 60% between 1992 and 2018. Both large and small young firms have lost offsetting market share.
A recent Census Bureau article documents the increased employment share of older firms (6 years+) in many key industries.
It also highlights the increased concentration of workers in large firms in the retail, health care, accommodation and food services sectors.
The WSJ articles itemizes the increased concentration of employment in large firms in the retail, services and finance sectors and documents that these are the growing segments of the economy.
The Business Dynamics Statistics database provides researchers with the consistently defined and reported data since 1977 to document the key role of startup firms in adding net new jobs to the US economy. Startup firms are one part of an ecosystem of firm, establishment and job creation and destruction that plays out through time in relatively predictable ways. The death rates of young, middle age and mature firms play a similarly important role. The growth and decline of new establishments in existing firms matters. The internal job growth rates of young, middle age and mature firms matter. The relatively small size of startups compared to mature firms has an impact on job growth. Historical parameters are generally similar and change slowly, causing the layers of employment by firm age to be similar in this 50-year period. The model and framework for measuring firms, establishments and jobs is solid. Startup firms are essential, but they are not the only driver of success.
“Jobs created by firm size” is similarly shaped by all of these factors which describe the typical firm life cycle. Small firms are not superior job creators. New firms are job creators, and they happen to have small individual employment levels (4 on average), so small firms have higher measured rates of job creation.
In the last 10-20 years there has been a significant decline in the rate of new firm creation as a share of total firms. New firms created have not lost as many jobs due to firm deaths in their first 5-10 years. Mature firms continued to shed a disproportionate number of jobs during recessions, but after the Great Recession began to add more net jobs due to internal growth than they had in the prior 40 years. The overall number of jobs created has remained in the 2-4 million per year range across the 50 years.
The conservative SBA, Kauffman Foundation, WSJ and Republicans promote policies to ensure a thriving entrepreneurial environment for new and small businesses. The more liberal Brookings Institute, college professors and Democrats have an instinctive distrust of big business and concentrated economic power, so also lend support to some pro-small business policies. If job creation falters during periods of economic prosperity, this may be a rare place where bipartisan agreements could be reached to promote new firm and job creation.
Many people complain that the US economy does not create enough new jobs or soon won’t create enough jobs or won’t create enough good jobs or … People worry about employment. Writers and politicians cater to that worry. Fortunately for us, the US economy creates jobs year after year after year, only briefly interrupted by increasingly less frequent and brief periods of economic recession. I’ll share the core numbers on healthy firms and new jobs and provide some context and history which indicates that this is inherent in the modern US economy. The economy is not relying upon any major political change or special insight to continue adding jobs. It just happens.
For 9 straight years, from 2011-2020, across 3 presidential terms and 5 congresses, the US economy added 2 million new jobs each year. In the 1980’s, it added 2-4M per year. In the 1990’s it added 3M per year. In the “oughts”, it added 2M per year. 30 years of expansion, 7 lesser years that averaged more than zero. 4 strong years for every 1 weak year..
The recovery since the pandemic has been even stronger, starting at 8M new jobs per year in 2021 before sliding to 6M per year and most recently 4.5M per year.
The total number of firms in the US grew slowly in the last 40 years, from 3.5 million to 5 million. The growth rate was much faster prior to the Great Recession (2007-9). Much of this growth was accounted for by single employee firms. Despite this tame 1% growth per year, the economy was able to add more than 2 million jobs per year.
The number of establishments (locations) grew almost twice as fast, just under 2% per year.
The US economy requires some growth in the number of firms or establishments each year to drive job growth. Fortunately, it does not require heroic growth rates.
The number of new establishments added per year is remarkably consistent, averaging about 700,000 per year on a base of 5-7M. Of course, this means that the RATE of new establishments is shrinking, from 14% to less than 10%.
Establishment exits have increased from 500K to 600K to 700K before returning back to 600K per year. Big picture, 700K new establishments and 600K lost establishments each year across 4 decades.
Firm deaths have also been consistent at 450,000 per year.
Data calculated from BDS data. Direct graph not available.
Firm births have also averaged about 450,000 per year but present a different pattern. Firm births were much lower in the troubled time around 1980. Births ranged from 450-500,000 per year in the next 25 years. The Great Depression destroyed businesses, access to capital, personal net worth and aggregate demand. Hence, new firm creation dropped back to the 400,000 level. It recovered back to the 450,000 per year rate by 2015. As with firm deaths, the rate has fallen from 14%+ to less than 10%. Most importantly, the birth and death rates have been relatively consistent and have both been relatively flat, leading to a slow increase in the number of US firms.
https://www.bls.gov/spotlight/2022/business-employment-dynamics-by-age-and-size/home.htm
The BDS database shows that job gains and job losses generally move together, but that in a recession job gains fall and job losses increase. This is a very important result. Without active government or policy intervention, the economy creates 12-14M jobs each year and destroys 11-13M jobs each year. There is no guarantee that net jobs will be created in any given year, but overall that is the normal result.
https://bipartisanpolicy.org/blog/trends-in-new-business-creation/
Writers who wish to emphasize the decline of entrepreneurship focus on firms instead of establishments because of the slower growth rate. They emphasize the growth rate rather than the growth numbers because this is less positive. They don’t compare the growth and death rates or numbers, which move together. They focus on the aftermath of the Great Recession which did greatly slow firm creation, resulting in slower than historical numbers and rates of job creation from new firms. Nevertheless, the economy created 2M new jobs per year for 9 years. During that period, existing firms captured a larger than usual share of the job growth required to provide demanded goods and services.
New establishments have driven 5-6M new jobs each year. The late nineties to early “oughts” reported the higher 6M per year figure.
Existing (continuing) establishments have added 10-12M gross new jobs each year.
Establishment deaths (including firm deaths) resulted in 4-5M jobs lost each year.
Continuing establishments trimmed 8-9M jobs each year, and many more during recessionary times. Although there are many moving parts, continuing firms eliminate more jobs than they create, especially during recessionary periods when they are adapting to lower demand. Firms die and they close locations, removing 4M jobs each year. New firms and new establishments add the new jobs required to fill the 2M net new jobs each year. This does not happen automatically or precisely, but overall, through time, the pattern is clear.
The US job market has grown from 90-150M positions during the last 40 years.
Firms hire 75M people each year. The typical job tenure is just 2 years.
Separations and hires generally move together. The net 2M jobs added annually is a small fraction of employment, hires, separations, gross job adds and gross job losses.
Establishment births exceed establishment deaths except during deep recessions.
New firms have high failure rates. Fortunately, firms that survive their first year have high percentage rates of new hires. They start with a small number of employees (4) and grow rapidly. The survival rate improves with the age of the firm and the employment growth rate of surviving firms tends to decline as they grow. The combined effect is that 80% of the new employees added by startup firms remain after 10 years. This employment survival rate has been improving in the last 15 years, partially offsetting the reduced number of start-up businesses.
https://www.bls.gov/spotlight/2022/business-employment-dynamics-by-age-and-size/home.htm
The first-year survival rate has remained roughly the same at 80% for 25 years.
The ratio of new employer businesses to population dropped significantly after the Great Recession, but has recovered in the last 4 years.
The share of “new employer businesses” dropped after the Great Recession and has not fully recovered.
The number of application for new business tax ids increased significantly after the Great Recession and jumped by 50% after the pandemic.
The Census Bureau also tracks a subset of the total new business applications based upon industry classification that is a better predictor of actual businesses eventually started. This measure shows modest growth after the Great Recession and a 30% spike after the pandemic.
About 10% of new business applications become new businesses. Hence, the rate of new business formation to be reported for 2022 is expected to be very high.
https://www.nber.org/digest/202109/business-formation-surged-during-pandemic-and-remains-strong
https://www.oberlo.com/statistics/how-many-new-businesses-start-each-year
https://bipartisanpolicy.org/blog/trends-in-new-business-creation/
https://bipartisanpolicy.org/blog/trends-in-new-business-creation/
About 80% of new businesses are formed based on opportunity and 20% based on necessity. Kauffman estimates that 2020 business formation was 30% based on necessity.
The US economy continues to generate 2 million new jobs in each non-recession year, even more in boom periods like the last 2 years. Firms and establishments are born, grow and die. The net employment growth rate for established firms is less than zero in their first 5-10 years and then slightly positive. The annual death rate of existing firms and establishments is relatively low, but on a 150M employee base it is 4M per year. The new jobs added by startup firms and new establishments allow the total number of employees to grow in normal years.
There is no “iron law of employment” that requires new firms or establishments to be created in numbers greater than the job losses. There is no law that requires surviving young firms to nearly offset job losses by young firms that die at a high rate. There is no law that requires mature firms (10 years old+) to add new employees or to die at slow rates. But these results have been consistent or improving for the last 40 years. I look forward to continued success.
I’ve always been a sceptic about the many claims that entrepreneurs, startup firms and venture capital are the “most” important drivers of improved quality of life in the US in my lifetime. I remain a sceptic. I believe that large firms deliver even more added value (driven by self-interest). I believe that the government and not-for-profit sectors play an equally important role. I believe that the government’s definition of the “rules of the game” and our culture’s influence on how people live their everyday lives are also very important. I’ll come back to the role of small firms in a separate blog post. I’ll try to tie together all of the strands of our amazing US labor market in another blog post.
But today, I want to tip my hat to the truly amazing role that startup firms play in driving the US economy and labor market.
https://www.bls.gov/bdm/us_age_naics_00_table1.txt
The US Bureau of Labor Statistics (BLS) tracks new jobs added (gains) and jobs lost (losses) each year in detail by firm and establishment (branch), including links to the year the firm was first created. At the total country level, we see that job creation and destruction follows the business cycle. The Great Recession, subsequent expansion and pandemic periods are obvious above. In the Clinton years, job gains averaged a great 15 million per year. The Bush, Jr. years showed still solid 13-14 million annual new jobs added. The Obama recovery increased new jobs from 10 to 13 million per year and Trump maintained this positive level at the end of a very long period of economic growth.
Job losses generally followed the pattern of job growth. Job losses are even more volatile. They peaked in the recessions of 2002, 2009 and 2021.
In the last 3 decades, the US economy added 2 million new jobs each year during periods of expansion.
Many economists, journalists and politicians claim that startups account for ALL new job growth. This is an “amazing” claim that deserves deeper analysis, investigation and description. I’ll chase this separately. The claim is “largely true”.
Startup firms delivered 4-5 million new jobs each year in the 1990’s. This declined to 2.5 million jobs during the “oughts”. It increased back to 3 million new jobs per year in the teens. In non-recessionary periods during the nineties and “oughts”, existing firms destroyed 2 million jobs each year. In the teens, the job destruction rates were much lower, roughly 1 million jobs per year. The startup jobs minus existing firm jobs number was typically 2 million net new jobs per year in positive economic years.
The BLS separates job gains from job losses and categorizes them by the firm’s first year of existence. Job gains at existing firms were roughly flat at 10 million per year. Startup firm new jobs declined from 4.5M in the nineties to 2.5 M in the “oughts”, recovering to 3M per year afterwards. Startup job creation declined from 45% to 31% of existing firm job creation, a one-third reduction.
The BLS provides data on the subtotal of all firms founded before 1993. These “mature” firms display a similar pattern. Annual job gains fell a bit from 4.5M in the “oughts” to 3M in the teens. Annual job losses fell even faster, from 6M in the “oughts” to 3.5M in the teens. Net job losses averaged 1.5M annually in the “oughts”, but just 0.5M in the teens.
The number of new jobs created by startups declined by one-third during this period, from 4.5 to 3 million per year.
The BLS data allows us to track the gains, losses and net jobs added by first year of existence for firms. First year startup jobs declined from 4.5M to 2.5M. The cumulative jobs created measured 10 years after startup is more positive. Cumulative new jobs, measured 10 years after startup, increased from 3M to 3.5M then dropped back to 3M in 2001. The startup classes of 2009-12, despite the Great Recession, report 2.5M net jobs added each year, as measured after 10 years.
Job losses have fallen much faster than job gains in the last 20 years, measured by a full decade of performance. The ratio of job gains to job losses has improved markedly. This ratio averaged 83% in the nineties, indicating that 1/6 new jobs was destroyed within a decade. This ratio has greatly recovered to the mid-90’s. indicating that new startups, in total, essentially maintain their initial jobs count a decade later. Other data shows that one-third of startups don’t exist after 10 years. Hence, this means that the successful remaining one-third have roughly tripled their employment in their first decade.
Firms die much faster than employment. There are many studies that claim that one-half, three-quarters, fourth-fifths or nine-tenths of employees at startup firms are eliminated in 10-20-30 years. These are mostly exaggerations.
Ten years after their founding, startups still employ 80-90-95% of their initial year hires. Job losses fell during the teens. Job gains grew rapidly after the Great Recession.
For the 18-year period where we have ten years of data on startup firms, we have a clear pattern of net employment decline at the end of the decade, on average. The ten-year retained employment level at almost 80% of the initial level is far higher than the 50% claimed by some commentators.
The years since 2009 show a clear pattern of startups maintaining 90-95% of their initial employment levels after 10 years.
The US economy typically added 2M net new jobs each year during periods of economic expansion. Historically, startups added 4M jobs annually to offset the 2M jobs eliminated by existing firms. The job destruction rate of existing firms has slowed. The jobs retention rate of startups has improved. Net, net, the US economy still generates 3M+ new jobs each year which essentially still remain a decade later. One-third of the firms are gone, but the winners employ 3 times as many as when they started.
Good News 